BRUSSELS, Dec 11 European officials are in
discussion with the International Monetary Fund, the World Bank
and other major financial institutions on ways to help Ukraine
if it decides to sign a free-trade agreement with the European
Union.

Ukrainian Prime Minister Mykola Azarov was quoted as saying
on Wednesday he had asked the EU for 20 billion euros ($27
billion) in aid to offset the cost of signing the EU deal, which
Kiev backed away from last month in favour of closer ties with
Russia, sparking huge street protests and a financial crisis.

It is not clear how Azarov came to the 20 billion figure,
but EU officials believe it was based on broad estimates of the
cost of lost trade with Russia, Ukraine's former overseer and
largest trading partner, and the financial burden of adopting a
wealth of regulations that come as part of the EU deal.

There is no question of the EU providing 20 billion euros to
Ukraine - the most Brussels has so far offered is 610 million
euros - as it would be almost impossible to get pan-EU agreement
at a time when it is struggling to help several indebted euro
zone member states.

But the combined impact of aid and financing programmes from
multiple institutions, including the EU, might go some way to
providing Kiev with the investment it needs to remain solvent in
the event it rejects Russia's advances and signs up with the EU.

"We're not talking about a coordinated package to entice
Ukraine out of Russia's arms and into the EU's," one official
familiar with the discussions told Reuters. "That would be the
wrong way of looking at it.

"It is just a case of the various institutions doing the
sums and working out what investment programmes there already
are and what others are in the pipeline and could be activated
if Ukraine decides to sign the association agreement."

As well as the IMF and World Bank, the discussions involve
the European Investment Bank and the European Bank for
Reconstruction and Development.

All four institutions already have operations in Ukraine,
though the IMF has suspended talks on a stand-by loan facility
because of Ukraine's failure to meet the conditions.

The World Bank mostly lends to specific industrial sectors
via its International Finance Corporation arm, while the EIB has
a mandate to finance major infrastructure projects, such as
roads, railways and power lines. The EBRD has invested nearly 9
billion euros in a range of public and private investments since
it first moved into Ukraine in 1993.

"We are a major catalyst for foreign direct investment in
Ukraine," said Anton Usov, a spokesman for the EBRD in Kiev. "If
we say we are staying here and investing, that sends a strong
message of confidence to the wider investment community."

IMF LOAN TALKS ON HOLD

The discussions among the institutions have been taking
place for several weeks as concerns have grown about how to hold
Ukraine's economy together, with solvency a pressing issue.

The cost of insuring Ukrainian bonds against default - a
measure of the risk international investors attach to owning
Ukrainian debt - rose towards a four-year high on Wednesday.

Much of the debt is denominated in dollars but must be
financed using the local hryvnia currency, which is at a
four-year low against the dollar and forecast to lose a further
9 percent in the next six months.

Without international aid, investors fear Ukraine will
struggle to repay $7 billion of hard currency debt falling due
next year, while it is also dealing with a balance of payments
deficit and unpaid gas bills from Russia.

In its efforts to find a solution to the rapidly escalating
crisis, the EU has also explored whether it could bring forward
financing that would have gone to Ukraine over the coming seven
years as part of its association agreement.

Any advances would only happen if Ukraine signs the deal,
and the current amount available - the 610 million euros - is in
any case conditional on Ukraine securing an IMF agreement.

The IMF wants Ukraine to introduce more exchange rate
flexibility - effectively allowing the currency to devalue - and
remove subsidies from domestic gas supplies, but Kiev has
refused.

Some EU officials say the IMF is prepared to be flexible in
applying its conditions, for example by allowing Ukraine to
phase in the removal of subsidies or retain them for less
well-off Ukrainians. But publicly, the IMF's line remains firm.

"The IMF is ready to move, especially on the commodity
prices issue," said the foreign policy adviser to one EU leader,
who spoke on condition of anonymity.

"If you ask them, they will deny it, but behind the scenes
there is a lot of discussion going on along those lines."

Asked where talks stood, an IMF official dealing with
Ukraine said there had been no progress, but the issue would be
discussed at a board meeting in Washington on Dec. 16.

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